PAVREIT’s 9MFY23 results met expectations. Its 9MFY23 gross revenue grew 24% driven by better rentals across the board and maiden contribution from Pavilion Bukit Jalil. Its premium retail assets are less vulnerable to downward pressure on occupancy and rental rates amidst rising headwinds in the retail sector. We maintain our forecasts, TP of RM1.47 and OUTPERFORM call.

Within expectations. PAVREIT’s 9MFY23 core net profit of RM203.5m made up of 72% and 71% of our full-year forecasts and consensus fullyear estimates, respectively. A DPU of 2.15 sen (YTD: 6.56 sen) is also within expectations.

YoY, its 9MFY23 gross revenue rose went up by 24% attributed to better rentals across the board but primarily driven by the inclusion of Pavilion Bukit Jalil Mall. Pavilion KL remained the top contributor with net property income (NPI) at RM85.6m, accounting for 71% of total in 3QFY23. Following that, Pavilion Bukit Jalil contributed RM22.1m, making up 18% of the total NPI, surpassing Elite Pavilion Mall as the second-largest contributor from the previous quarter. Non-operating cost rose by 43%, largely driven by a significant increase in borrowing costs (+51%) from greater drawdowns to fund acquisitions, coupled by a rising rate environment. Overall, this affected 9MFY23’s earnings, but still translated to a distributable income and core net profit of RM217.7m (+16%) and RM203.5m (+12%), respectively.

Outlook. PAVREIT’s retail assets are likely to remain resilient as they are in prime locations, with the observed increase in occupancy rates contributing to its strength. However, the anticipated growth of the retail segment may face some headwinds due to persistent high inflation and concerns of higher cost of living, potentially impacting consumer purchasing power. Additionally, retailers could also still face challenges in maintaining their profitability due to increasing labour and utility costs. Nevertheless, it is worth noting that the group's top mall, Pavilion KL, caters to the high-income group, which is expected to remain relatively unaffected given their financial security. Therefore, we anticipate PAVREIT to be in a favourable position in sustaining consistent earnings moving forward, even in the face of a challenging economic outlook.

Forecasts. Maintained.

Maintain OUTPERFORM and TP of RM1.47. Our TP is based on our FY24F gross DPU of 8.5 sen against an unchanged target yield of 6.0% (derived from a 2.0% yield spread above our 10-year MGS assumption of 4.0%). The low yield spread is to reflect its prime asset portfolio as anchored by Pavilion KL and Pavilion Bukit Jalil. We believe these premium retail assets are less vulnerable to downward pressure on occupancy and rental rates amidst rising headwinds in the retail sector on the back of sustained high inflation that hurts consumer spending. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) rising risk-free rate, (ii) lower-thanexpected rental reversions, (iii) weaker-than-expected occupancy rates; and (iv) loss of footfall to new rival malls.

Source: Kenanga Research - 27 Oct 2023